Multiple Choice Questions

1. A capital expenditure

a. Adds to an asset.

b. Is expensed immediately.

c. Is a credit like capital (owner’s equity).

d. Records additional capital.

2. Which of the following items should be accounted for as a capital expenditure?

a. The monthly rental cost of an office building

b. Taxes paid in conjunction with the purchase of office equipment

c. Maintenance fees paid with funds provided by the company’s capital

d. Costs incurred to repair leaks in the building roof

3. Suppose you buy land for $2,900,000 and spend $1,200,000 to develop the property. You then divide the land into lots as follows:

CategorySale Price per Lot

10 Hilltop lots .......$525,000

10 Valley lots ....... 350,000

How much did each hilltop lot cost you?

a. $246,000

b. $175,715

c. $234,285

d. $410,000

4. Which statement about depreciation is false?

a. Depreciation should not be recorded in years that the market value of the asset has increased.

b. Depreciation is a process of allocating the cost of an asset to expense over its useful life.

c. A major objective of depreciation accounting is to match the cost of using an asset with the revenues it helps to generate.

d. Obsolescence as well as physical wear and tear should be considered when determining the period over which an asset should be depreciated.

5. Boston Corporation acquired a machine for $33,000 and has recorded depreciation for two years using the straight-line method over a five-year life and $6,000 residual value. At the start of the third year of use, Boston revised the estimated useful life to a total of 10 years. Estimated residual value declined to $0.

What is the book value of the machine at the end of two full years of use?

a. $13,200

b. $16,800

c. $10,800

d. $22,200

6. Boston Corporation acquired a machine for $33,000 and has recorded depreciation for two years using the straight-line method over a five-year life and $6,000 residual value. At the start of the third year of use, Boston revised the estimated useful life to a total of 10 years. Estimated residual value declined to $0.

How much depreciation should Boston record in each of the assets last eight years (that is, year 3 through year 10), following the revision?

a. $13,200

b. $3,300

c. $2,775

d. Some other amount

7. King Company failed to record depreciation of equipment. How does this omission affect Kings financial statements?

a. Net income is overstated and assets are understated.

b. Net income is overstated and assets are overstated.

c. Net income is understated and assets are overstated.

d. Net income is understated and assets are understated.